Consideration

By Asok Nadhani

3.1 Consideration

a.     Consideration is an act or abstinence for promise; done at the desire of the promisor, by the promisee or any other person [sec.2 (d)]. So, it has 3 basic elements

-        It is an act of doing something. 

-        It may also be an abstinence or forbearance.

-        A return promise.

b.     So, Consideration may be expressed in following ways:

i.      Consideration is the price of fulfilling a promise. In general terms, consideration is the benefit to accrue (though it may be abstinence, forbearance, loss to some party) in terms of money or something of value, for which a promise is made. Consideration is one of the essential elements of a contract and may exist in forms other than money.

ii.    The term 'consideration' ordinarily means quid pro quo, i.e., something in return. This means benefit gained by a party to the contract in return of promise made by him. A party who has undertaken any obligation under a contract, must receive 'something in return'. This ‘something' which the party gets in return is called as consideration.

iii.   A valuable consideration in the sense of the law may consist of either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Thus, consideration must result in a benefit to one party and a detriment or loss to the other party or a detriment to both.

3.1.1 Legal requirements of Consideration

i.      It must give rise to some benefit to one party (or loss to the other party) in return to the promise.

Ex. X promised to pay donation to a club. This is not a valid contract as there is no benefit accruing to X.

ii.     It must move through a promise. A voluntary act does not give rise to a consideration.

Ex. A saved B’s goods from fire without being asked by B. A cannot demand payment from B for the voluntary services not asked by B.

iii.    Consideration may be past, present or future, as explained below:

a.    Past consideration: The consideration received by a party in the past (i.e., before formation of the contract), is called as past consideration. Where a party has already performed his obligation (i.e., before formation of the contract), he has supplied past consideration.

Ex. A rendered some service to B on his request. Later B agreed to pay A for the service done. A can now recover the amount promised from B. Here the promise is made on past consideration.

Ex. A pays B Rs 2000 to supply certain goods. B must deliver those goods to A. Here the promise is made on executed consideration.

b.    Present consideration: The consideration which is received by a party at the time of formation of contract, is called as present consideration. Thus, where a party performs his obligation simultaneously with the formation of the contract, he has supplied present consideration.

c.     Future consideration: The consideration which will be received by a party in future (i.e., after formation of the contract), is called as future consideration. Thus, where a party agrees to perform his obligation after formation of the contract (e.g., at a future date), it is said that he has supplied future consideration.

Ex. A promises B to deliver some goods after a week. B promises A to pay within 7 days of receipt of goods. Both A and B must fulfill their respective obligations as per terms of contract. Here the promise is made on future consideration.

iv.    Consideration need not be adequate. The law requires that there must be consideration in every contract. Even if it is proved that such consideration is inadequate, the contract is valid, provided the consent of the parties is freely given.

Ex. A promised to B to sell his entire lot of antique valuable furniture at Rs.10,000 only. Held, this is a valid contract if A has freely consented to the agreement. The consideration need not have any regard to the actual value of the furniture.

v.     Consideration must be real and not illusory. A contract to do something illusory, unreal & impossible is not valid.

Ex. A promises B to bring life to his dead wife from the bed. This is a void contract as it is unreal & impossible.

vi.    Consideration must not be something which is duty of the promisor. No consideration emerges for something done which the person is bound to do under the law or a part of duty.

Ex. A’s son is missing. He registers a police diary. Meanwhile he also declares a reward whoever can fetch his son. A policeman of that police station brings back his son and asks for the reward. Held, the policeman cannot claim the reward because it is his duty to fetch his missing son for which he has already reported to the police station.

vii.   Consideration must not be illegal, immoral or opposed to public policy.

Ex. A promises B to pay Rs 1 lakh to abduct C. This is not enforceable as the object is illegal.

viii. Abstinence or forbearance may be a consideration. Sometimes, the consideration may be abstaining from doing of some act (i.e., not to do some specified act). Non-doing of certain act by a party results in negative consideration. 

Ex. A’s verandah on 1^st floor fell down and injured B in the ground floor. A threatened to sue B unless B promised to pay Rs.500 for as compensation for B’s injury. B promised but later refused to pay, claiming that there was no consideration for his promise. B can recover the amount because B’s abstinence from legal suit is a valid consideration.

ix.    Consideration may move from promisee or any other person. Where a third party furnishes the consideration, it is valid consideration. Thus, consideration may move from promisee or any other person, it is immaterial to who has supplied it. This rule is generally stated as 'Privity of consideration is not required'.

Ex. A, B and C enter into a contract under which A promises both B and C that if B paints A's house, A will give Rs. 5000 to C. B does the work. A must give the money to C as the consideration has moved to C.

Ex. A & B, two brothers, on partition of joint family property, agree between themselves to invest some money to support their mother. The mother may now enforce A & B to make the investment, though she was not a party to the agreement (the agreement of investment was between the 2 brothers A & B).

3.2 Contract without Consideration

In certain cases, a contract is valid even without any consideration, such as:

i.      Promise to pay a time barred debt: It is enforceable if it is in writing and signed by debtor or specifically authorized on his behalf [s.25(3)].

Ex. A promises to pay B Rs.1000 towards a past debt which is now barred by limitation. This is a valid contract and A must pay B as per contract.

ii.    Agency: No consideration is necessary to create an Agency [s.185]. An agent may enter into a contract even if there is no consideration for him.

Ex. A, appoints B to sell his house giving him a power of attorney. B makes contract with C to sell him the house on behalf of A. Held, the contract is valid if it is made by B within his authority, even if B does not get any commission or benefit out the deal.

iii.   Compensation for voluntary services : A promise to compensate voluntary services is enforceable even without consideration [S. 25(2)].

Ex. While B is away on holiday, a storm damages the roof of his house. A, his neighbour carries out the necessary repairs. On his return, B promises to pay A for the expenses of repairs. A can recover the money from B.

iv.   Bailment: Consideration is not necessary to effect a valid bailment of goods (called Gratuitous Bailment).

v.     Charity: If a person promises to contribute to charity and on this faith, the Promisee undertakes a liability not exceeding the promised subscription, the contract shall be valid.

vi.   Remission: Where a person agrees to receive less than what is due to him, such an agreement is remission. No consideration is required for a contract of remission. (Sec. 63)

vii.  Guarantee: A ‘contract of guarantee’ is a contract to perform the promise or discharge the liability of a third person, in case of his default. A contract of guarantee is not valid if made without consideration. However, the consideration received by the principal debtor is a sufficient consideration for the surety and the contract of guarantee shall be valid even if no consideration is received by the surety. (Sec. 127)

viii. Love & Affection: Agreements expressed in writing under the law on account of natural love and affection is enforceable, even without any consideration in following cases:[Sec. 25(1)]

a.     The agreement is made in writing. Though oral agreement is binding on the parties, agreement out of love & affection, without consideration, will be binding only if it is made in writing.

b.    The agreement is registered. Ordinarily, an agreement is not required be registered. However, an agreement falling under this exception shall not be valid unless registered.

c.     Between the parties standing in immediate relation. The parties must stand in ‘immediate relation to each other’.

d.    Natural love and affection between the parties. The act must be out of love and affection between parties.

Ex. Out of love and affection, X promises his son to give Rs 1 Lac and executes a deed. It is valid contract. Though there is no consideration for X for executing the deed for his son because this contract has been done out of natural love and affection between the parties.

ix.   Contract with Seal: A contract made in the form of a deed under seal is valid even if it is made without consideration.

x.     Completed Gifts: The consideration is not needed between donor and donee. So, the rule, ‘No consideration, no contract’ does not apply to gifts made and accepted. Hence, gift made without consideration is valid. (Explanation 1 of sec.25) 

3.3 Stranger acting in a Contract

i.      As a general rule, only the parties to a contract can sue and be sued on that contract. The Contract creates a relationship subsisting between the parties who have entered into a contractual obligation. This doctrine is based on following principles:

a.     A person who is not a party to a contract cannot sue upon it, even though he has supplied consideration.

Ex. D, a Tyre company sold its tyres to its dealer T, on the condition that the tyres would not be retailed below D’s list price and anyone selling below the list price would pay D Rs 100 per tyre. T sold some tyres to a sub dealer S, who retailed a few tyres at a lower rate than the list price of D. D claims from S Rs 100 per tyre undersold. D cannot recover as there is no contract between D & S.

b.    A contract cannot confer rights or impose obligations arising under it on any person other than the parties to it.

ii.     However, in the following cases, a third party (who is not a party to the contract) may also act in a contract:

a.     In a Trust, the beneficiary may enforce a contract. The person creating the trust is called the Author of the trust. The person for whose benefit the trust is created is called as Beneficiary. The person who is entrusted with the trust property and to execute the trust is called as Trustee. The agreement creating the trust is entered into between the Author of the trust and the Trustee.

Ex. A agrees to B to transfer some property to B which B must hold as trustee for benefit of C (the beneficiary). Now C can enforce the contract even if C is not party to the agreement (the agreement is between A & B).

Beneficiary is not a party to the agreement creating a trust. However, the trust is created for beneficiary and the trust property belongs to the beneficiary. So, the beneficiary is entitled to sue the trustee for the enforcement of duties of trustee even though the beneficiary is not a party to the agreement.

b.    In Marriage, partition or family settlement, the beneficiary may enforce a contract even though he may not be a party to such settlement.

Ex. A & B, two brothers, on partition of joint family property, agree between themselves to invest some money to support their mother. The mother may now enforce A & B to make the investment, though she was not a party to the agreement (the agreement of investment was between the 2 brothers A & B).

c.     Contracts entered into by Agent, is enforceable if done by agent within his authority on behalf of the Principal. The principal can enforce the contracts entered into by his agent provided the agent has acted within the scope of his authority and in the name of the principal.

Ex. A, appoints B to sell his house giving him a power of attorney. B makes contract with C to sell him the house on behalf of A.  Held, the contract is valid if it is made by B within his authority, even if B does not get any commission or benefit out the deal.

d.    Acknowledgement. Where a person acknowledges his liability to a third person, he is treated as an agent of such third person and so can maintain an action in the contract.

e.     Assignment of a contract. Assignment is the right transferred from one person (Assignor) to another person (Assignee), under Transfer of Property Act.

After assignment, the assignee may exercise all the rights the assignor previously could, even though the assignee was not a party to the contract originally made.

f.      Covenants running with land. In case of transfer of immovable property, the purchaser of land is bound by certain conditions or covenants with original land owner, though he is not a party to the original agreement of the conditions or covenants relating the land.

 For more details, refer to Mercantile Law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com